Software Blowups Sow Fears That AI Boom Is Leaving Some Behind

(Bloomberg) — The stock-market carnage keeps piling up for software companies that disappoint Wall Street, fanning fears that the artificial-intelligence arms race is creating a new generation of winners and losers.

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Already this year, a stark divergence has built up within the Big Tech complex — an index of software stocks is in the red, while a gauge measuring chipmakers’ shares has rallied 24%. Clearly, impatience is mounting with companies that fall short of expectations at a time when chipmakers and other hardware firms look set to reap profits from their investments in AI.

On Thursday, MongoDB Inc. became the latest in a series of software players to underwhelm, reporting a weak first quarter and lowering its full-year sales guidance. Investors responded by sending its shares 25% lower on Friday, moves that are rippling out to peers like Datadog Inc.

The MongoDB moves were preceded by a 20% plunge in Salesforce Inc., its biggest one-day drop since 2004, and a 34% slide in UiPath Inc., after both firms posted weaker-than-expected sales growth. And last week, Workday Inc. endured its biggest selloff since 2016.

“This is enough to say the software weakness is more signal than noise,” said Mark Luschini, chief investment strategist at Janney Montgomery Scott LLC. “Software had been standing head and shoulders above other areas of spending, so to see this kind of pullback is concerning.”

This earnings season, just over half the S&P 500’s software companies have topped sales expectations, data compiled by Bloomberg show, compared with more than 70% for chipmakers.

Anurag Rana, a senior technology analyst at Bloomberg Intelligence, said few software companies are seeing a revenue uplift from AI so far, with Microsoft Corp. a high-profile exception. Instead, the money has gone toward hardware or cloud-computing Goliaths like Alphabet Inc. or Amazon.com Inc.

“Most companies don’t have dedicated AI budgets, so they’re taking money out of the non-AI bucket and reallocating it,” he said. “They’re still buying Nvidia chips and Dell servers, but they’re not signing large software deals. Software will eventually benefit from AI, but it could take years to build that up, and improvement in the second half of the year is out the window by this point.”

Concerns about the backdrop have grown so acute that even more positive results have failed to excite. The cloud banking software company nCino Inc. beat expectations with its first-quarter report and adjusted earnings forecast, but the stock slipped anyway as investors zeroed in on an unchanged revenue outlook.

There is “little to no tolerance for uncertainty/this type of print,” analysts at KeyBanc Capital Markets wrote, “particularly as software peer bellwethers have noted worsening macro/sales cycles.”

Truist Securities analyst Terry Tillman highlighted UiPath as an example of a company he would avoid, as it undergoes a turnaround. Instead, he would “rather own more expensive stocks with machine-like execution.”

Some reckon, however, the sour sentiment is creating buying opportunities. Bernstein analyst Peter Weed wrote that Thursday’s drop could represent “the discount we’ve been waiting for” for companies like ServiceNow Inc.

“We wonder if there is a bit of sorting going on in the market, with those companies more positively exposed to AI and productivity stories getting more budget priority,” Weed wrote. However, a Cloudflare investor day featured positive comments, and in channel checks for ServiceNow, “we’ve heard nothing but positive demand,” he added.

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